What Are HTM Securities?
Held-to-Maturity (HTM) securities are debt instruments that a company intends and is able to hold until they mature. These securities are typically bonds or other fixed-income investments that provide a predictable stream of interest income over a specified period.
How They Work
HTM securities are classified based on the intent and ability of the holder to keep them until they mature. Unlike trading securities or available-for-sale (AFS) securities, HTM securities are not affected by market fluctuations after they are purchased. They are recorded at amortized cost on the balance sheet, meaning that the purchase price is adjusted for any amortization of premium or discount over the life of the security.
Pros and Cons
Pros:
- Stable Income: Provides a predictable stream of interest income.
- Reduced Volatility: Not subject to market fluctuations, reducing income statement volatility.
- Accounting Simplicity: Recorded at amortized cost, simplifying accounting and financial reporting.
- Stable Income: Provides a predictable stream of interest income.
Cons:
- Liquidity Risk: Cannot be sold without reclassification and potential accounting consequences.
- Interest Rate Risk: Fixed returns can be disadvantageous if interest rates rise.
- Limited Flexibility: Commitment to hold until maturity restricts the ability to react to changing market conditions.
- Liquidity Risk: Cannot be sold without reclassification and potential accounting consequences.
Example
A company purchases a bond with a face value of $100,000, a coupon rate of 5%, and a maturity of 10 years. The company intends to hold this bond until maturity, classifying it as an HTM security. The bond pays $5,000 in interest annually, providing a steady income stream. The bond is recorded at its purchase price and will be adjusted for any premium or discount amortization.
FAQs
What Are Examples of HTM Securities?
HTM securities typically include government bonds, corporate bonds, and other fixed-income investments that the holder intends to keep until they mature.
How Are HTM Securities Reported on Business Financial Statements?
HTM securities are reported at amortized cost on the balance sheet. Interest income from these securities is recognized in the income statement.
What Is an Example of HTM Securities?
An example of HTM securities is a corporate bond that a company buys with the intention of holding until its maturity date. The bond provides fixed interest payments and is recorded at amortized cost on the company’s balance sheet.
Takeaway
HTM securities provide stable, predictable income and are less volatile than other types of investments. However, they come with risks related to liquidity and interest rate changes. Understanding HTM securities and their implications for financial reporting can help businesses make informed investment decisions and manage their portfolios effectively.
